relationship between the asking price and the income generated by the business or property, with the expectation of earning a satisfactory return on their capital. It’s a peculiarity of the stock market that normally rational people ignore common sense approaches to business valuation and often throw caution to the wind when it comes to investing in common stocks. Thrilling tales of enormous contracts to come, stunning product breakthroughs, dazzling growth rates from now till the hereafter, have all been the hallmark of the advice peddlers on Wall Street. Unfortunately, many investors respond to this siren song and often wind up with shipwrecked portfolios.
We try to buy stocks below their calculated “intrinsic value”. As a yardstick, we are interested in price level below what a buyer, typically with cash, would be willing to pay for a business. This process generally involves looking for a specific combination of attributes. Among those attributes: 1) A stock price that’s low relative to current earnings or cash generating capabilities. 2) A business where one feels reasonable comfortable with a five year outlook (no rapid product cycles or the risk of technological obsolescence). 3) A management that’s capable and honest, with a history of acting in the best interests of all shareholders. In essence, we are looking to buy $1.00 worth of business value for $.60. Our expectation is that by employing this approach- patiently buying dollars for sixty cents-over a variety of companies, it’s likely, even probable that we’ll have a satisfactory outcome.
One final item to note; this value based approach frequently leads us to common stocks or industries that are out of favor and sometimes surrounded by negative headlines: think of pharmaceutical stocks during President Clinton’s proposal for a national heath care plan. That’s OK. We can live with owning stocks that are temporarily out of fashion because that usually means we are purchasing them at very reasonable prices. But it does require patience and a willingness to be temporarily “out of step” on the part of the investor. We have found this to be a very successful long-term strategy.
We appreciate the trust you have placed in us. Should you have any questions or comments, please don’t hesitate to call us.
Very truly yours, Eckart A. Weeck